Instant View: Demand at ECB's 3-year tender exceeds first round

FRANKFURT (Reuters) - Banks took 530 billion euros at the European Central Bank’s second-ever offering of 3-year funding on Wednesday, essentially in line with market expectations.

Following are analysts’ and policymakers’ comments on the operation.

SLOVAK FINANCE MINISTER IVAN MIKLOS

“To sum up it will have a positive impact in the short run, but there are questions about medium-term impacts. The ECB’s ability to pull back these funds will be important.”

ANDERS MATZEN, NORDEA

“This is an astonishing amount. We have net provisions of liquidity of 307 billion euros and if we add in the 91-day tender, we have 313.5 billion euros. We have a lot of extra liquidity among euro area banks. It is almost impossible to underestimate the positive impact from the first LTRO. It’s fair to expect a similar reaction from the second LTRO. Although we will not see an immediate reaction in financial markets. With the second LTRO, we have plenty of fuel for risk improvement, with a further narrowing in yields in Spain and Italy. We should probably see Euribor rates going lower. EONIA rates will probably not move much from these levels. They are already at rock bottom.

“This is one further step away from the abyss of the debt crisis that we saw before Christmas. The effect of the LTRO is basically like valium for financial markets.

ANNALISA PIAZZA, MARKET ECONOMIST, NEWEDGE STRATEGY

“The ECB second 3-year LTRO has been successful. At a first glance, it looks like today’s LTRO refi auction injected another (net) 250-300 billion euros of cash in the system.

“A high number of banks bid at today’s auction - 800 - a sign that the “stigma” associated to the auction has somehow dissipated. Opportunity carry trades and the relaxation of the collateral criteria have certainly been key factors supporting the auction today. Further tightening in EMU periphery spreads can be expected now. However we rule out that the movement will be as pronounced as since the December 3-year LTRO as fundamentals don’t justify another massive movement.”

PETER CHATWELL, CREDIT AGRICOLE CIB

“You can’t argue with 529bn, it’s undoubtedly positive for risk assets and also will help to support core markets as initially banks need somewhere to store the resultant excess liquidity. Over the next quarter the supportive impact on Bunds is likely to abate though, as banks put the excess cash to work and there may be more switching out of Bunds as investors continue to re-weight into the periphery.”

FABRICE COUSTE, HEAD OF CMC MARKETS FRANCE

“It can be seen either as glass half-empty, that is to say that banks are rushing to the ECB’s till because they expect fresh difficulties ahead ... or glass half-full, given that the general environment has improved a lot since December and banks would be stupid to pass on this offer of cheap funding. Sovereign debt may be slightly less attractive than before in terms of yield, but it’s still offering several hundred basis points and it’s - almost - without risk.”

ION-MARC VALAHU, FUND MANAGER AT CLAIRINVEST, GENEVA

“Given the up-take it shows there is still a major need for liquidity. The strong banks will most likely not have taken large amounts but the weaker, peripheral banks in Spain, Portugal and Italy will show big requirements for it and they will likely use the funds to do carry-trades on their respective countries sovereign debt.”

MICHAEL SYMONDS, BANKS CREDIT ANALYST, DAIWA CAPITAL MARKETS

“The number was broadly in line. There was some fear a low number would be negative for risk assets and in that respect it will have an immediate positive impact on risky assets. But let’s step back and look further forward... new risks are now raised by the wall of maturity in three years time.”

DAVID THEBAULT, HEAD OF QUANTITATIVE SALES TRADING, AT GLOBAL EQUITIES, IN PARIS

“This removes the systemic risk. The figure is not big enough to spark fears about the health of the peripheral, while at the same time it fuels hopes that it will help the economic recovery. Now the focus will turn to the ECB’s overnight deposit facility. If the number falls, it means the money is being put at work. I’m staying ‘long’ euro zone equities, although I’ll start buying put spreads soon to get protection against a possible short-term pull-back.

FRANCOIS DUHEN, STRATEGIST AT CM-CIC SECURITIES, PARIS

“It will probably help risky assets because the amount is a bit larger than what people were expecting. That should rather be helpful for the equity market, normally it means more money available for cyclicals and it would be positive for banks.

“I would have expected a negative impact on the euro exchange rate, but it’s not so clear because if you believe that risky assets will be in favor, then the euro is seen as a risky asset versus the dollar.

“Now we have it and then people will move on to something else. I don’t think this is significant good news.”

MANOJ LADWA, TRADER AT ETX CAPITAL

“The ECB LTRO was a touch more than the market had expected, banks desperately needed the funding.

“It could prop up the equity market, but with another round of cheap money unlikely by the ECB I only expect it to be a slow move up.”

CHRISTIAN SCHULZ, BERENBERG BANK

“This is in line with our expectations. It may not lead to a boom in equity markets, but also not to a depression. The ECB’s measures are still very supportive for the continuous recovery in economic sentiment, which should eventually lead to an acceleration in growth.”

NICK MATTHEWS, RBS

“The market will probably react positively. The large take up will support those who see it as helping issuance for sovereigns going forward.

LUCA CAZZULANI, UNICREDIT

“This will increase the level of excess liquidity pretty sharply which is ultimately positive or very positive for risk trades. Italian and Spanish bonds are likely to benefit from this and equity markets as well.”

ANDREW CROOK, SUCDEN FINANCIAL PRIVATE CLIENTS

“The rally since the first LTRO has been impressive, sending the FTSE above 5900. Today’s news that long term financing was more than the estimated 500 billion euros has taken the market by surprise and the resistance level of 5956-5966 could well be broken. The key question is what will the banks now do with the money?”